CBN Overdraft to Nigerian Govt. Increased to N13.11 Trillion

Due to persistent fiscal slippage, the Central Bank of Nigeria (CBN) overdraft extended to the Nigerian Government increased to N13.11 trillion at the end of the fiscal year 2020, Cordros Capital said in a research report.

Some rating agency including Fitch, Agusto & Co had said in separate reports that the monetary policy authority has consistently breached its 5% guideline on Ways and Means (W&M) lending.

When asked whether the overdraft amount is included in Nigeria’s total public debt which printed at N33.1 trillion at the end of the first quarter, Cordros Analyst told MarketForces Africa the amount is not currently accounted for in the nation’s debt profile.

“It is after the securitize the ways and means that it will be included”, Cordros Capital analyst Abdulazeez Kuranga said.

The report noted that fiscal slippage or inability of the government to generate an amount needed to finance both recurrent and capital expenditure resulted in heavy reliance on CBN financing between 2016 and 2019.

“It is common practice for governments to make recourse to the debt market to finance budget deficits. However, developing countries with large fiscal slippages and weak debt markets tend to rely on their monetary authorities to bridge fiscal deficits”, the report added.

Nigeria, a petrol-dollar powered economy, revenue generation stress in 2016 following a decline in the global oil prices and volume output which almost grounded government spending capability.

Both determinant variables for revenue estimation, oil price and volume production and perhaps supply quota as members of the oil cartel, remain outside government control.

In the new report, Cordros analysts said actual revenue has fallen short of budgeted revenue by an average of 39.3% between 2016 and 2019, while expenditure was below the prorated budget by 13.2% within the same period.

Nigeria’s actual revenue grew by 39.8% between 2016 and 2019, while expenditure -excluding Government-Owned Enterprises – surged faster by 61.3% within the same period.

Cordros Capital stated in the report that outstanding overdrafts to the federal government rose from N2.63 trillion, translating to 2.6% of GDP in 2016 to N8.72 trillion or 6.0% of GDP in 2019.

“Given the impact of the twin shocks (the pandemic and downturn in oil prices) on government finances in 2020, the Ways and means balance increased by N4.39 trillion to N13.11 trillion as of December 2020”, it added.

During the economic recessions in 2016 and 2020, analysts at Cordros Capital said they observed increased reliance on Central Bank financing due to the need to reflate the economy.

“This may be justified given the large size of the public sector and the need for an expansionary fiscal policy.

“For instance, due to the magnitude of the shocks in 2020, the actual amount of borrowing from the W&M stood at NGN4.39 trillion – the highest since 2007 when the CBN started keeping the data.

“However, we observed that during periods of relatively stable macro conditions – GDP growth of 1.91% in 2018 and 2.27% in 2019 – the FGN still relied more on the CBN to finance its operations than tax revenue”, the firm explained.

Cordros Capital analysts noted that the preceding stemmed from underperformance in actual revenue compared to budgeted revenue amidst a persistent increase in total expenditure.

According to the report, the actual fiscal deficit widened ahead of budget.

Explaining further, Cordros said to provide a better context, the average yearly W&M of N2.45 trillion to the FGN over the past five years (2016 to 2020) was 127.0% above the average yearly tax revenue of N1.08 trillion during the same period.

“When viewed as a percentage of total revenue, we note that the average W&M to the FGN was 58.6% between 2017 and 2019 – significantly above the averages of 0.0% and 0.8% for Ghana and Kenya, respectively”.

The situation becomes more precarious when we compare CBN’s W&M with total borrowings over time.

“… for every one billion naira total borrowings obtained on average between 2018 and 2019, the FGN obtains an additional two billion naira in W&M from the CBN on average during the same period”, the firm added.

With the deterioration in debt service/revenue ratio from 44.6% in 2016 to 59.6% in 2019, the government has been compelled to rely on cheaper financing from the Central Bank.

Cordros said borrowing from the CBN breeds fiscal complacency as efforts and initiatives required to strengthen tax administration and expand the tax net may be delayed.

Asides from that, analysts said the overdraft also reduce CBN’s asset quality, a situation that draws multilateral lenders attention in recent times.

“A major challenge that deficit monetisation presents is that it weakens the balance sheet of the CBN – increased lending to the FGN without periodic repayment and or Securitisation reduces the apex bank’s asset quality, which has a negative impact on shareholders’ funds.

“This would send negative signals to foreign investors on macroeconomic stability, amplify capital flow reversals during adverse economic conditions and make investors demand higher rewards in the form of a risk premium”, the firm stated.

It added that ordinarily, a one-off deficit financing by money creation may only generate a one-off increase in the price level without any material impact on long-term inflationary trends.

However, if deficit monetisation becomes a recurring theme, it could lead to sustained inflationary pressures that will make the attainment of price stability more difficult.

Analysts attributed the rising headline inflation rate to the CBN monetisation, saying that over the last two years, the headline inflation rate has diverged materially from the medium target of 6.0%-9.0% and the long-term average of about 12.0%.

“Considering that the FG spending pattern is skewed towards recurrent expenditure, which typically results in increased money in circulation, continuous recourse to Central Bank financing could complicate inflation targeting”, Cordros Capital said in the research note.

It added that the practice has the tendency to worsen the local currency and drive external sector pressures, noting that real returns on naira-denominated investments would remain negative or low in the medium to long term.

Moreover, analysts said with the local currency still susceptible to external shocks, domestic investors are likely to take solace in foreign asset investments, which would amplify exchange rate pressures.

“Increased domestic inflation relative to foreign inflation increases the overvaluation of the domestic currency, especially in countries that utilise managed exchange rate systems”.

As the currency becomes more overvalued and the price level increases, imports would likely increase relative to export, putting the Current Account in a deficit position.

“Based on these, we think persistent CBN’s financing of the FGN’s deficit would further deteriorate the overall macroeconomic stability conditions of the country over the medium-term if not urgently addressed”, the report said.

In the last five years, FG borrowings from the CBN, in particular, has expanded more than 500%, Agusto & Co said in a report. Meanwhile, the apex bank reported N2.864 trillion deficit financing in 2020 in its book.

CBN Overdraft to Nigerian Govt. Increased to N13.11 Trillion